www.jacobs.com | worldwide Innovation that provides sustainable solutions to complex challenges worldwide
Intergenerational Cost-Estimates:
Challenges and Solutions for Long-Term Cleanup Decision Making
April 11, 2018
CH2M is now Jacobs
Paul Favara (Jacobs) Dr. Keith Thomsen (NASA) Dan Pitzler (Jacobs)
Agenda
• The challenge with long-term cost estimates
• Current practices, and what guidance tell us
• Survey of decision documents with long-term cleanup time
• The economics of long-term cost estimating
• Case study involving one long-term cleanup
• Conclusions and recommendations for preparing long-term cleanup cost estimates
The challenge with long-term cost estimates
• The easy sites have been cleaned up; we are left with the most-complex sites
⎯ NRC estimates 12,000 complex sites still require cleanup, of 126,000, and $209 billion needed to cleanup (EPA 2004)
• A greater percentage of organizations’ remediation budgets are allocated to long-term O&M
• RI/FS guidance (1988) did not consider the intergenerational possibility of cleanup
⎯ we were quite optimistic about time of remediation
• “Stakeholders may question the practice of discounting costs over 30 years, because even after 30 years, someone is still responsible for managing
sites that have not reached unlimited use and unrestricted exposure”.
(ITRC, 2017)
Guidance in Discount Rates for Cleanup
Guidance Source Recommended Rate Timeframe Comments
1988 RI/FS (EPA) 5% after inflation and before taxes
Generally not longer than 30 years
Sensitivity of 3 and 10 percent
1993 OMB Circular A‐94 (supersedes 1972
guidance)
7% “real” discount rate Not specified Rate approximates marginal pre‐tax ROR in private sector in recent years
2000 FS (USACE) For >30 years, include a
“no‐discounting”
scenario, but for comparison only
For projects > 30 years Complies with USEPA Policy
Survey of decision documents with long-term cleanup time
Site Date Time or Remediation
(years)
ROD Basis
Paducah, KY 1995 1900 30 yrs
Hanford 200 West 2012 150 150 yrs @ 2%
Hunterstown, PA 1993 Inestimable (DNAPL) 30 yrs
Naval Air Development Center, PA
1997 Inestimable 30 yrs
Waterloo, IA 2004 > 100 yrs 30 yrs
West Site, ME 2002 35‐1000 years 30 yrs
Rodale, PA 1999 Inestimable 30 yrs
Anniston, AL 2011 1,233 ‐ > 10,00 years NA ‐ FS basis
NASA Santa Susanna Field Laboratory (SSFL), CA
Pending 35‐380 years (area
dependent)
N/A – CMS basis
www.jacobs.com | worldwide
May 7, 2018
© Copyright Jacobs
The economics of long-term cost estimating
From Investopedia!
• The nominal interest rate is conceptually the simplest type of interest rate. It is simply the stated interest rate of a given bond or loan.
• The real interest rate is so named because it states the “real” rate that the lender or investor receives after inflation is factored in; that is, the interest rate that exceeds the inflation rate
• Discounting accounts:
⎯ for changes in time
⎯ rate at which consumption changes
⎯ rate at which marginal value of consumption changes
⎯ rate at which the future utility from consumption in discounted with time
• It’s really hard to predict for long time horizons
Change in Nominal and Real Interest Rates for Treasury Bonds (30-year basis)
0 2 4 6 8 10 12 14
Interest Rate (percent)
Year
Nominal Real
Latest OMB A‐94 Guidance (updated 1972 guidance)
PV for Four Different Discount Rates Over 100 Years Would Decisions Change with Different Rates?
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100
0%
0.7 %
10 %7 %
Total Life Cycle Costs
Total Years
At Year 100, and $ 100K per year:
Discount Rate Present Value Total Present Value
10% $ 8 $ 1,099,920
7% $ 123 $ 1,526,810 0.7% $ 50,128 $ 7,224,538 0% $ 100,000 $ 10,000,000
Key Economic Considerations
• Current guidance (EPA, 1992) on discount rates calls for:
⎯ 7% for Federal Jobs
⎯ Higher for private jobs (sometimes more than 10%)
⎯ The use of real interest rates may apply if all alternatives result in the same value
• Discounting is essential for short- and medium- term private financial decisions (assess investment versus return)
• The higher the rate, the lower the PV cost
• There is an implicit assumption that money will be available in the future for this specific project when it is needed – not always the case
• For Superfund projects, states do not want to take on long-term O&M after 10-year period
Economics of Intergenerational Impacts
• By discounting a future cost to zero, you are making a statement that the cost borne by future generations are irrelevant to the decision being made.
• The choice of an intergenerational discount rate may be considered a moral or ethical matter, not an economic decision
• Also, some projected growth rates have impossible economic considerations when considering intergenerational aspects
• Traditional methods may create “false future” to base decisions upon
⎯ Future generations may value habitat more significantly
⎯ Would we use the same approach and technology on today’s natural
landscapes as we did in the past (e.g., straightened rivers, installed dams)?
The problem with using discount rates over generations
• The real interest rate should reflect cost and benefit to a single entity (e.g., a corporation) – not society
• Economy/values will change
• Technology will change and impacts on remediation costs are uncertain
• Not really intended to show values of future generations
• Future generations may have different values
• Would our great grand-parents have envisioned space travel and the internet?
Growth in Consumption (estimates vary) 1800-1984 (1.4%)
11890-1984 (1.8%)
1$8,378 (1947)
$36,793 (2017) 2.14% Y/Y growth
1. From A. Rabl. Ecological Economics, Vol.17, p.137‐145 (1996)
Can we sustain year over year growth for hundreds of years?
Assess how much we have changed in 200 years as a society
Is this kind of demand on resources sustainable?
What effect will population growth, societal improvement, technological development and climate change or “extreme weather”
have on availability of resources
Many researchers recommend a declining discount rate over time (though there is disagreement on the rate and value of the decline)
Several countries, such as France and the UK, use this method for public projects
$36,793 $147,908
$2,391,545
$40,141,163,000
$1 $10 $100 $1,000 $10,000 $100,000 $1,000,000 $10,000,000 $100,000,000 $1,000,000,000 $10,000,000,000 $100,000,000,000
2018 2118 2318 3018
Consumption
Year
Consumption (per capita US) Over Time
www.jacobs.com | worldwide
May 7, 2018
© Copyright Jacobs
Case study involving long-term cleanup at SSFL
Challenging Terrain
Photo of NASA Test Stand at SSFL (photo courtesy of NASA) SSFL’s Complex Terrain (photo courtesy of P. Favara)
TCE Plumes at NASA at SSFL
LOX, ELV & Bldg. 204
Area Plumes Alfa Plume
Bravo Plume
Coca Plume Delta Plume
From: SSFL NASA Area 1 LOX and Area II Groundwater Monitoring Report Annual 2017 (NASA, 2018)
How long should the groundwater CMS represent time to achieve cleanup objectives
• Time of remediation for three alternatives considered for four different areas
• Plumes are stable (are not advancing)
• No continuing source adding to contaminants in the subsurface
• Time of Remediation varies from 35 to 380 years (alternative and area specific); timeframe driven by:
⎯ 60 year old plumes in a complex fractured sedimentary rock setting
⎯ Most of the contaminant mass is adsorbed in the rock matrix
• Time of remediation is back diffusion limited
⎯ High TCE concentrations at three locations
Preliminary Time of Remediation Estimate for Different Alternatives
Alt 1 = MNA with land-use controls
Alt 2 = MNA with source area treatment via pump and treat Alt 3 = MNA with source area treatment via EISB
Location Only Natural Attenuation
(years)
Natural Attenuation with Treatment of Target Treatment Areas on Figures 4‐5 and 4‐6 (years)
Reduction in Time to Achieve Media Cleanup Objectives
Alfa 185 140 (Alternative 3) and 150
(Alternative 2)
24% (Alternative 3), 19% (Alternative 2)
Bravo 380 290 (Alternative 3) and 300
(Alternative 2)
24% (Alternative 3), 21% (Alternative 2)
Delta 210 170 (Alternative 3) and 180
(Alternative 2)
19% (Alternative 3), 14% (Alternative 2) LOX Areas 1, 2,
3, and 4
35(1) 105 (2)
Not Applicable Not Applicable
$‐
$5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000
PV SL @ Estimated
TOR
PV 0.7% @ Estimated
TOR
PV 7% @ Estimated
TOR
PV 4% @ Estimated
TOR
PV SL @ 30 yrs
PV 0.7% @ 30 yrs
PV 7% @ 30 yrs
PV 4% @ 30 yrs
ALT 1 ALT 2 ALT 3 Tipping Point
Alternative Costs with Different PV and Time Scenarios (and the “tipping-point”)
Best Match latest
OMB Circular Middle
of Road PV (since 1979) Current EPA
Guidance
Full Project Life‐Cycle 30 Yr Remediation Time
Alt 1 = MNA with land‐use controls
Alt 2 = MNA with source area treatment via pump and treat Alt 3 = MNA with source area treatment via EISB
0% Discount
Best Match
latest OMB Circular
Middle of Road PV (since 1979) Current EPA
Guidance 0% Discount
Interpretation of Cost with Different PV and Time Scenarios
• There is one important “tipping-point” with Alternative 1 for the zero discounting
• Alternatives 2 and 3 have inconsequential tipping points (virtually the same number)
• An approximately $5 million active remedy reduces time of remediation by 14- to 25-percent
⎯ is this significant given uncertainty in modeling and long-term projections?
⎯ Does it make sense to wait several years on more robust modeling results?
• Substantially larger target treatment area has a de minimus effect on the time of remediation
• Traditional 30 year estimates and 7% discount rate provide significantly different perspectives on life-cycle costs, compared to estimated time of remediation and lower discount rates
Selection of remedial alternative is complex and cost is only on factor to consider
The decisions required are complex and driven by multiple, often competing considerations
Monetization of value and risk Current costs versus future costs
Current approaches to resource valuation vs future approaches
Impacts to ecosystem and habitat form and function
Stakeholder values (e.g., Native Americans) Archeological and biologically sensitive areas
Freshwater Marsh – Open Water Habitat
(Photo courtesy of NASA)
Adaptive Site Management
• One way to deal with uncertainty over long time frames
⎯ Likelihood of technical innovation is very high
⎯ Definition of what may be considered “done” in the future may change
⎯ Respond to unplanned events or observations
• Adaptive site management will be implemented to address long- term uncertainties in performance and awareness of new
technologies
⎯ Plan for progress milestones and make changes if getting off track
⎯ Have a “Plan B” to implement, with different trigger points identified
• Drive periodic reviews to identify newer cost saving approaches
⎯ In-well sensing technologies or Star Trek field analyzers?
⎯ Remote Environmental Sampling Platforms (RESP™) using UAVs to reduce/eliminate road maintenance
With a long-term cleanup, considerations on technology advancements
• Can we predict remediation technology in 30 years, and longer?
• Consider where we were we in 1988 and consider advancements since then?
• Can we bet on remote sensors and analyzers?
• Road maintenance is a significant cost - will our UAV Sampling Platform be ready soon?
• The need for adaptive site management and flexible decision documents is critical
⎯ Need to have milestones and objective standards that trigger periodic reassessment of technology and performance
⎯ Have “Plan B” ready to go
www.jacobs.com | worldwide
May 7, 2018
© Copyright Jacobs
Conclusions and Recommendations
Conclusions and Recommendations
• There is significant uncertainty in projecting long-term discount rates
• Environmental, social, and economic drivers across the globe have the potential to disrupt growth and stress resources
• There is no consensus on the correct intergenerational discount rate
• Using the USEPA recommended rate of 7% and limited to 30 years creates a false future on the true costs of long-term remedies and may result in
misinformed decisions
⎯ E.g., makes passive long-term remedies look more cost effective that more active approaches
• Regulatory constraints can be more challenging in the future, with
decreased detection limits and identification of more emerging contaminants
Conclusions and Recommendations
• Using lower interest rate seems appropriate for long-term cost estimates and is a hedge on uncertainty consumption in the future
• Incorporate adaptive site management and define transition points
• At a minimum, evaluate alternate discount rates, multiple discount rates, and different time horizons
⎯ The analysis may show no “tipping-points”
⎯ A tipping-point may require further evaluation to assure its impact on decision making is considered
• Consider use of declining discount rates over time
• Plan on the future with hovercraft access
Remote Environmental Sampling Platform (RESP) ™
www.jacobs.com | worldwide
May 7, 2018
© Copyright Jacobs
Thank you!
Paul Favara (Jacobs) Dr Keith Thomsen (NASA) Dan Pitzler (Jacobs)
